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Welcome back!
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We want to make the Corner Office Gazette E-Notes your go-to source for topical information regarding sales-force effectiveness, the productivity of your organization & staff, the rapidly changing world of executive compensation and those other every-day decisions a senior executive must make. If I do not address issues of immediate importance to you, feel free to call or write. My webmaster Christopher also wants me to remind you that copies of our E-Notes from prior months are available at our website. www.wilkeningco.com
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NEXT MONTH:
The power of employee retention to the bottom line.
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It is a good time to remind ourselves that as this recession progresses, key selling and marketing jobs will typically take on increasing importance as firms begin to position for a recovery and strive to again break even by relying more on the top line. As we all know, there is only so much you can do with expense control & downsizing. Hence, key-existing and high-potential-prospective sales and marketing resources become crucial to the company as this recession ages. Not only do you want to keep your performers, but you do not want your competitors to have them!
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A client recently asked me for advice on how to set 2010 pay benchmarks for their sales force. Let me share two of the points discussed:
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- Make sure you pay equal to or better than the market or your competitors for sales talent. If the market will increase 2 1/2 % next year, make sure to increase your salaries or total cash at least that much, or by a greater amount [e.g.: 4-5%]. Remember, you can always build and maintain a premium pay structure if you (in truth) pay for performance.
- Do not underpay your sales talent. Act rapidly and aggressively to correct situations where people are found to be underpaid.
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These are probably good rules for any and all key company jobs, but it strikes us that the sales force and marketing team need both assessment and attention, right now.
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WHAT WE HEAR ON THE STREET
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Confirmed! – Recent economic turmoil is having a significant negative impact on company morale.
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A recent survey (McKinsey Quarterly June 2009) of over 1,400 global executives from a broad mix of businesses revealed that 96% of all respondents felt that there has been a reduction of employee morale as the result of (global) economic turmoil. Further, nearly 40% of all respondents believe that the reduction in morale has been significant. What do you think? Answer our anonymous survey.
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HOW'S MORALE AT WORK?
Take a second and fill out our quick survey on morale.
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Surveys are tabulated independently and anonymously, so privacy is assured.
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We would have been surprised to see a different result from the McKinsey survey, but we are somewhat surprised by the extreme negative impact on overall morale seen by these executives. It is highly likely that your company is also suffering from some reduction in morale over the last year.
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How to address morale problems? We think this two-step approach is always a good prescription for a CEO or senior executive:
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- Communicate—Tell your staff and employees what is going on in the business and what is being done to fight this recession thing. Do not be afraid to tell them bad news. If they believe they are in the same boat with you, they will fight harder for you and pick their heads up to look around for a better route, even in bad weather.
- Touch—Get out of your office and go out in the work space, plants and shops and talk with employees. Show them you take an interest in their welfare and you personally care enough to spend 5 minutes talking about their machine, project, what bothers them or yesterday's baseball game. In my experience, talking with or greeting folks where they work will put a smile on their face long after you have stepped away. Do you know how few executives do this?
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THE POWER OF EMPLOYEE RETENTION
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About a decade ago I was designing a sales-compensation plan for a publicly-traded national software-publishing company that operates within the insurance industry. I was interviewing the newly-minted Chief Financial Officer over lunch one afternoon to make sure that I knew what he wanted the new sales-pay system to do for the company. He instead gave me a bold and shocking recommendation.
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He told me that we should terminate all of the high-cost senior sales reps—about 10 of them—and then replace them with junior and less experienced sales reps whose compensation cost (per rep) would be much lower than those just fired. "We would save a whole bunch of money," he said. He then continued with his salad and smiled with great satisfaction, sure of the correctness of his advice.
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In the short run (or about a month or two) he would be theoretically and precisely correct. But in the long run, losing key and experienced sales representatives is a disaster. While that conclusion is intuitive, why is this actually true?
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Wilkening & Company has developed the Sales-experience Curve. [see graph below] to help explain this dilemma. The Sales-experience Curve is based upon four conclusions or facts:
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- Sales effectiveness can be defined as the ability of a sales representative to take a given sales territory or portfolio of accounts and be able to achieve an expected level of production or performance measured against management's assessment of the potential of those accounts. Hence, a territory may be adjudged to have a $2 Million potential by management. If I get $2 Million from that portfolio of accounts my sales effectiveness is 100%.
- Sales effectiveness will increase over time (with tenure) as the sales representative increasingly learns products, client needs and the sales process. We assume all new reps are hired with fully developed sales skills and are capable as a sales representative at the start. Of course, sales-skill training—as needed—may need to be supplied.
- On average, it takes roughly two years for the average newly-hired sales representative to become fully experienced and capable within the territory or with their portfolio of accounts—and able to achieve 100% sales effectiveness. This conclusion is based upon studies conducted in the software industry by a national consulting firm during the 1990's.
- Sales effectiveness can increase to levels in excess of 100% as experience and expertise are gained over time. In fact, Wilkening & Company experience shows that after about three years on the job a sales rep will start to produce at premium levels of performance as they provide extra value added to the sales process and account base. For example, if you look at the experience curve the following sales-effectiveness increases occur after the third year—
- After 3 years on the job--+15% premium sales effectiveness
- After 5 years on the job--+30% premium sales effectiveness; and
- After 6 years on the job--+50% premium sales effectiveness.
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Will an experienced sales rep exhibit—on average—130% sales effectiveness at 5 years of tenure? While there is no data to show the exact number, we all know that this premium exists; or should exist. Further, we all know that an experienced rep is going to perform better than a rookie—with the same book of accounts.
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"...he would be throwing out roughly 5-10 times that amount in contribution margin because of reduced sales..."
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So why was the CFO wrong for wanting to throw out 10 high-cost and experienced sales reps and replace them with 10 cheaper rookies? While he would save about $200,000 in annual pay cost, he would also be throwing out roughly 5-10 times that amount in contribution margin because of reduced sales - 130% sales effectiveness for an experienced rep, versus 60% sales effectiveness for a rookie (after a year).
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What does your Sales-experience Curve look like?
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The Sales-experience Chart also provides answers to many other sales-management questions or dilemmas. Like, what is the ROI of sales training or the cost of hiring the wrong candidate? Let's talk more about those questions in August.
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